Five Point Holdings LLC (FPH) 2017 Q3 法說會逐字稿

Welcome to the Five Point Holdings Third Quarter 2017 Earnings Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

Before I turn the conference over, I would like to read the following forward-looking statements.

Thank you and good afternoon, today's conference call may include forward looking statements including statements regarding Five Points' business, financial condition, results of operations, cash flows, strategies, and prospects. Forward-looking statements represent only Five Points' estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results that may cause Five Points' actual activities or results to differ materially from the activities and results anticipated in forward looking statements. These factors include those described in today's press release, at Five Points' SEC filings, including those included in the risk factors section of the most recent quarterly report, Form 10-Q, filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements.

I now would like to turn the conference over to Mr. Emile Haddad, Chairman and CEO. Please go ahead, sir.

Thank you, Jay and welcome everyone. Today, I'm joined by Erik Higgins, our Chief Financial Officer; Mike Alvarado, our Chief Legal Officer; Lynn Jochim, our Executive Vice President; Greg McWilliams, our Regional President, Mike White, our Treasurer; Leo Kij, our controller.

We are also joined by Kim Tobler, our Vice President of Tax, in case some of you might have some questions about the latest tax changes. Last quarter was very busy, and we have some very exciting news to share. Let me start with Newhall Ranch, with reapprovals we received from the state of California and the county of Los Angeles, the settled agreement we announced on September 25, and after 14 years of legal battles, we are very excited to announce that we started land development at Newhall.

The first area we are developing is Mission Village, which is approved for up to 4,055 home sites, and approximately 1.5 million square feet of commercial development within this village. With the start of development a year early, we are revising our projected delivery date for home sites to builders from the end of 2020 to the end of 2019. As we mentioned in our settlement press release, there are two local groups who chose not to be part of the settlement agreement.

It is possible these groups could seek an order from the court attempting to enjoin our development activities. If such a request is granted, we would have to put the development on hold pending the outcome of the legal challenge. However, the fact that we have chosen to commence development is an indication of our confidence that the state of California and the county of Los Angeles followed the law when issuing the respective reapprovals of our project.

If we were to be put on hold, we would revise our projected delivery back to the end of 2020. For now, we are projecting sales to the builders at the end of 2019.

Los Angeles is dealing with a major housing crisis, according to John Burns Real Estate Consulting LLC, Los Angeles County generated 467,000 jobs between 2011 and 2016, and there were 97,000 total permits issued for sale and for rent during the same period. That is approximately five to one ratio of jobs to total permits. It is against this backdrop that we will be bringing much needed home sites to the market at Newhall.

In addition to our residential sales, we expect that we will develop income producing properties on the commercial land at Mission Village. This first village will include similar amenities and infrastructure to what is included in our other communities. Mission Village will have an elementary school, 25 acres of parks and sports field, two community recreation centers, a public library, a fire station, and approximately 670 acres of open space with approximately 6 miles of trails.

I will move south now to the Great Park neighborhood in Irvine. This past quarter, we completed the sale to the builders of Cadence Park, our newest neighborhood. We sold 1,007 home sites to eight builders with an average price per acre of $4.6 million. The home sites were deliver graded, the builders have the responsibility to put in the utilities and feeds within the respective areas.

Home sales are expected to start as early as March of 2018. At our two existing communities, Beacon Park and Parasol Park, the percentage of homes sold is approximately 99% and 66% respectively as of October 31, 2017. The housing shortage pictured in Orange County is similar to Los Angeles County. Orange County generated 208,000 jobs from 2011 through 2016 according to John Burns, yet for the same period, only approximately 52,000 residential permits were issued.

That is approximately a four to one ratio of jobs to total permits.

On October 1, we had the grand opening of the Five Point Amphitheater in Irvine, a 12,000-seat live music facility operated by LiveNation. The community has already enjoyed free concerts at the new venue.

The second [Cadence Wave] is under construction which is within walking distance of the residences being built at Cadence Park. The second phase of the Great Parks Sports Complex is scheduled to be completed in January and the existing athletic fields in phase one are already being fully utilized.

Moving north, the San Francisco market remains one of the strongest markets in the country, fueled by high demand and extremely low availability of new products. From 2011 through 2016, almost 249,000 jobs were created according to John Burns, while the total number of residential permits for the same period were approximately 29,000. That is over an eight to one ratio of jobs to total presence.

At the San Francisco shipyard and Candlestick Point, we continue to build infrastructure. Our anticipated partnership with [Maithridge] is on target and we expect to open a lifestyle outlet mall in 2021. In addition, we are working on plans for approximately 1 million square feet of vertical development including office space, a hotel, and retail to be built by 2022.

We are also projecting sales of over 2000 home sites between 2019 and 2022.

As we reported before, the passage of Proposition O in San Francisco last November enables us to plan and develop office space within the city without being subject to the city's limited allocation of office entitlement under the city's Proposition M. A developmental space in which all other developers in the market place are subject.

We are seeking approval for additional 2 million square feet of office space, for a total of approximately 5 million square feet and we expect to receive the approvals by the middle of next year. At the shipyard, we completed construction of a new commercial kitchen which accommodates 63 caterers. Ultimately, we will turn the kitchen over to be operated by the city, which will provide food to many Bay Area catering businesses and food trucks.

Additionally, we commenced development for a new artist facility that will house 130 artist studios. This will complement the existing artist building that currently houses 150 artists. When completed, it will be one of the largest artist communities west of the Mississippi. These projects provide important cultural amenities that enhance the lifestyle of our community. Our newest business segment we will be reporting on is our commercial development and leasing business. It is my pleasure to introduce Dave Sears, who has joined us to head our commercial operation. Dave has had a 30-year career in commercial development including leading JPMorgan's commercial asset management and investment business for 11 years in the Western US where he oversaw a multi-billion dollar portfolio through all phases of development and evolving multiple product types including office, industrial, and multi-family.

Before that, Dave worked at [PREMCO] CBRE, and the Irvine Company. Dave and the team had been busy finishing the construction of the Five Point Gateway Campus in Irvine, previously, the Broadcom Campus and we are expecting the first move ins by the end of this month.

As I mentioned before, the team is also working on several commercial buildings at Candlestick Point, and the shipyard in San Francisco. And the at the Great Park neighborhood in Irvine, we are currently processing our plans for Base Camp. Base Camp is our mixed use village which will include approximately 500,000 square feet of office and lifestyle retail space with an emphasis on food and beverage, hotel and residential. Base Camp will be developed next the Great Park Sports Complex that sits within the larger Orange County Great Park which will be almost twice the size of Central Park in New York upon completion.

We continue to execute on our strategy of monetizing our residential land and building our commercial properties while we deliver infrastructure and unique amenities that accelerate the virtue of circle in each of our communities. As you can see, we stay true to our brand by consistently creating the synergy between the five elements that make up Five Point. In order for us to provide communities where people live, work, play, learn, and connect.

Finally, as you probably know, Amazon put out a request for a proposal to build a second headquarters. Our communities were identified in the bids from the California region as assets that meet the criteria put out by Amazon, and could accommodate their needs not only for commercial space, but housing and lifestyle.

We mentioned this only to highlight the quality and influence of our communities in major cities in California and to underscore our partnership with the state. Now, let me turn it over to Erik before we open it up for your questions.

Thanks, Emile. And thanks to all for joining us this afternoon.

The summary of our quarterly results was included in the earnings release issued earlier this afternoon. We intend to file our 10Q tomorrow. The financial results for the third quarter reflect our continued investment in Newhall Ranch and the San Francisco Shipyard in Candlestick Point, as well as earnings from our investment in the venture developing Great Park neighborhoods.

Focusing first on our liquidity and capital position, we ended the quarter with the cash balance of $387 million which is a $127 million decrease for the quarter. The decrease was primarily related to our $106.5 million investment for a 75% interest in a joint venture which acquired the Broadcom Campus. Total capital of the Company at the end of the quarter was flat at $1.8 billion with virtually no debt obligations on our balance sheet. Our debt to total capital ratio is approximately 5.5%. We are pleased to announce today that we increased our senior unsecured revolving line of credit facility from $50 million to $125 million and extended the maturity date to April 2020.

Borrowings under the facility bear interest at LIBOR plus margin ranging from 1.75% to 2% based on our leverage ratio. Currently, no funds have been drawn against the facility. With our cash balance, the availability of $125 million under our unsecured line of credit and our conservative balance sheet, we are well-positioned to meet our capital needs as we commence development of operations at Newhall Ranch.

Our operating results for the quarter are as follows. Total consolidated revenues were $11.6 million for the quarter, this consists primarily of revenue recognition and collection of fees from builders from prior period land sales.

Management fees collected under our various management agreements and revenue from our agricultural, energy, and golf operations at New Hall. There were no land sales at Newhall Ranch or the San Francisco shipyard and Candlestick Point during the quarter.

At Great Park neighborhoods, the venture sold to eight builders 1,007 home sites located on 103 net acres for 475 million. The venture's gross margin on these land sales was approximately 29%. Five Point recognized $23 million in equity earnings from our 37.5% investment in the Great Park venture after adjusting for the basis difference between the fair value of our investment and our portion of the venture's book value.

The Great Park venture is self-funding and has sufficient cash to operate without the need for capital contributions from its members. In addition, the venture recently paid a distribution of $120 million to the holders of its legacy interest. This was the first distribution to count against the aggregate of $565 million in distributions payable to the holders of the legacy interest.

Corporate individual G&A was $37 million for the quarter, and on a consolidated basis, the net loss for the Company was -- on a consolidated basis, was $10 million and of this amount, $6 million of the last was allocated to non-controlling interests resulting in a net loss attributable to the Company of $4 million.

With that, we will open it up to questions.

(Operator Instructions)

Michael Rehaut, JPMorgan.

Hi, it's Jason in for Mike.

Just to start off, congratulations on the sale of Great Park, I just wanted to understand you know, as part of that process, how competitive was it, you know, what do the interest look like and when you look at the ultimate sale price relative to the original plan, how did that compare?

Well, I mean, it was competitive in the sense that there was a lot of interest from the builders, we went through an auction process and in terms of the valuation, it was pretty much consistent with what our projections were.

Okay, great. And then just from a price appreciation standpoint, as you look at Great Park over the course of this year, how are the prices there in terms of the home segment still trended relative to your expectation?

Well, the challenge you have when you look at appreciation within one community is that you know, the mix of product plays a lot into what we track at the home price, and our suggestion, we are going through right now, a process here to where we are going to start tracking all the homes within our communities and then all the homes within the larger airline market for instance in order for us to have a better picture as to what actually home prices are doing, it's very misleading to try to look week over week in terms of what the price has done. But I think that's you know, John Burns just recently published some numbers in terms of home price appreciation in the market place and I can look it up if you want, but we are trying to get a little bit more time to take on that and just looking at recent week average price of the builders.

Okay, great. And then just lastly, Newhall, it's great to see that you started development. I just want to understand with the remaining groups that did not enter into the settlement, do you know what their intent is, are they holding out for a better settlement? I guess how should we think about what the timeline looks like when you know that you will be fully in the clear?

Well, I can't tell you what the intent is, as I said, they have an ability to file an accord, we feel very comfortable with where we are, otherwise, next development, you know, to my knowledge, they chose not to settle not because of a specific ask, but one of the things that we bargained for as part of the settlement was a limitation on the plaintiff's ability to make certain challenges on future approvals and at least from what had been publicly said but the two local groups that did not settle is that they felt like that's a limitation they are not willing to live with.

Okay, great. Thanks.

Stephen Kim, Evercore.

Yes, thanks very much, guys, and yes, exciting times.

Emile, I was wondering if you could maybe give us a sense for when you said that you're beginning development at Newhall, just a little bit more clarity around you know, exactly what does that mean? I understand that there is, I guess, some trapping going on and tree removals, curious as to you know, I assume there is heavy equipment therefore on the site, just so you can give us some sense of what exactly development beginning at Newhall actually looks like?

Good. So you know, we started actually a few weeks ago, immediately after the settlement, what we call trapping and clearing which is a process that we have to go through before you actually move the big equipment. The equipment is all moving and actually, we have land development going on and will go on now, and so you -- we actually are going to be moving a lot more equipment as we go forward because the way we want to develop this is we want to develop it coming out from different angles to accelerate the delivery.

So you know, in technical terms, the equipment forms a spread and we will have multiple spreads that will be moving dirt. And so if you were to come and visit with me next week, you will smell a lot of diesel on the site.

Okay, great. That's exciting.

All right, and then with respect to moving up from the timeline of Newhall, I was wondering if you could tell us if there is any debt implications for that and if you thought about would that require you to do something in terms of perhaps raising debt earlier than previously expected as well?

Well, I mean as Erik said, we have the capital right now, in terms of cash, and we have the capacity with the expanded line accredited, we have in order for us to meet the obligations that are ahead of us. As we have previously -- we expect to access the capital market at some point in time and we are assessing that as we speak and see where that opportunity might present itself in the future.

Okay, but nothing new there yet.

You know, I have to as ask a question, obviously on tax policy, and a lot of changes that have been suggested and we know that nothing is obviously set yet, however, I was just travelling around with some of your friends recently and they were saying that they did an analysis of the average home buyer for Lenar and they had said that they thought that for that buyer that the tax implications will be net neutral. I was wondering if maybe if we could use that as a launchpad, have you analyzed what the proposal as it stands today, would mean for what you envision to be your typical customer out in California understanding that this is obviously a fluid situation.

Sure. Well, the answer is yes, we have done our own analysis, and based on our own, by profiling each of our communities, and we come to a very similar conclusion to others who have said that to you, you know, our capability of what else has done an analysis for us and the implication is probably the best way to do it is it will be equivalent to less than 0.2 percent of the move in the mortgage interest rates. So it's really -- it's not going to move the needle in terms of reportability so we come to the same conclusion even with a -- with our profile of a buyer which shows a little bit you know, more expensive -- they buy more expensive homes than the average price of I think, not the others are looking at across the board.

Okay, great. And I would love to follow up with that analysis later but congratulations and look forward to your success in the future.

Thank you very much.

Stephen East, Wells Fargo.

Yes, actually this is Paul Przybylski on for Stephen. First, I guess, how much capital would you be willing to put into Newhall until you -- before you get, you know, absolute final clearance without any further objections, I guess, what would be the total development expense for Mission Village?

Well, first of all, I don't have exactly the total amount in front of me, so it's $300 million that we are putting, I think about $300 million to $400 million to get to the gross revenue, but the answer to the question is we are very comfortable moving forward and just to put it in perspective, we have the ability to start development before the settlement, we waited until we got comfortable with the settlement to move forward and the fact of the matter is the two groups that chose not to settle would have been fighting for as not to start development, you know, they really want to file something, we expect them to file something sooner rather than later. Otherwise, it beats the purpose for them because we are moving forward with the development.

Okay, and then I guess how did your development cost you know, at Cadence, compare to the budget and what were the biggest positive and negative variances there?

You mean, you are talking about the cost and not the revenue?

Yeah, the cost.

We were pretty much on target. Our cost has not been fluctuating at all. We have long term contracts on our projects that we lock us in and so we haven't seen any real impact from the cost side, it's pretty much in line.

Okay, and then just one last -- you mentioned that you can't is that the next mile marker we should look for at Great Park or would there be another, I guess, residential sale before that comes to market?

We expect that our residential sales next year as well, I highlighted that more in the context of our new segment which is our commercial development but we expect residential sales next year as well.

Sure. Thank you.

Will Randow, Citigroup.

Mr. Randow? Mr. Randow, you may begin.

I'm sorry, sir. He doesn't seem to be responding. We will go on to the next question.

Alan Ratner, Zelman and Associates.

Hey guys, good afternoon and congrats on all the progress here in the quarter. Nice to see Newhall moving forward. Just a couple of questions here, I guess first on the SG&A, roughly $37 million, that's a bit higher than you were running the first couple of quarters of the year, I know you highlighted the Newhall settlement in there but I just wanted to make sure I understand exactly -- should we think about this as more of an appropriate run rate now that it's kind of your first full quarter as a public company, or is something more in that $28 million range you -- previously more applicable?

Yes, this quarter was a little higher as you mentioned due to a legal expense related to the settlement that we did in Newhall, and we also had two compensation plans that were approved by the board in the quarter and so we increased our accrual in the third quarter to catch up for that, but on a normal kind of annualized basis, the way I would look at it, Alan, is our total GAAP G&A expense is right around $130 million from that, you know, we generate about $20 million in management fees, and then about $20 million would be -- it's not cash expense related to stock programs and so on a cash basis, we are running right around $90 million a year and I think that would be a fairly normal run rate for us.

Perfect, that's very helpful, Erik.

Second, on the -- I just want to make sure I'm understanding the accounting here. So you had the $23 million roughly profit from the J.V. line which is from the Great Park sale, if I kind of just plug the numbers in here, you know, in terms of the revenue 460 or so in the 29% gross margin, and you're 37.5, I get to a much larger number, I know you mentioned the cost basis and the step up in your investment there.

So I was hoping you could just expand on that a little bit, you know, part of that profit, I guess, deferred through just to step up in your cost basis or is there something else that is going on there?

So the partnership had total revenues of $450 million, and the income at the partnership level as about $125 million, so if you -- so Five Point share of that is 37.5% so that gets you to right around $46 million to $47 million. From there, we actually adjust to make an adjustment downward to account for the difference in the fair value of our investment at Great Park neighborhood versus our share of the book value. So in other words, we stepped up the value of our investment but the partnership didn't step up their book value.

And so when we formed the Company, the basis adjustment was about $138 million in total, and now the amortized over the life of the project, so this quarter, on the $47 million of income, we recorded a basis adjustment of $24 million to get to equity and earnings of $23 million for Five Point.

Got it. So but in terms of the cash benefit that will accrue to you obviously to the timing that you are paying the legacy investors first, but is that $47 million more a better way to think about what is going to be coming to you down the road?

Well, that's just an income number.

Okay. Got it. Okay, no, I appreciate that.

And then just one more if I can, squeeze it in. On the development costs, I was curious if you could just either quantitatively or qualitatively have there been any adjustments to either the three projects as far as your total development cost expectations over the length of the projects at the beginning of the year?

Not in any meaningful way, I mean, except for what has been announced as part of the settlement agreement which I think was about $40 million but when you look at it in the context of the total budget for Newhall, it's a rounding error, so no, the answer to the question is we have not have not had any meaningful adjustment in cost.

Great. Okay. Thanks guys. Good luck.

Thank you.

(Operator Instructions). Nishu Sood, Deutsche Bank.

Hi, this is actually Tim Daley on for Nishu, thanks for the question. So I guess just quickly to follow on the questions about the Newhall development acceleration. So I just wanted to check, are you guys confident that if you were to accelerate forward one year, you would have the appropriate mechanisms in place in the market with the labor shortages that many, many, obviously you stepped up the value chain and the builders but would you feel like you -- to get the labor available to be able to fully basically transition a year earlier in the development cycle?

Yes, I mean, look, we are in different business than the builders, the builders are very heavily reliant on labor force to build their own, our business is much more equipment than it is labor and so we really are not subject to the same pressures that the builders are right now under because of labor force, labor issues. So the short answer to the question is yes, but in terms of at least putting it in context, the you know, we are really much more relying on grading equipment and things like that and so we have that in place, we have the contacts in place, and we have no concerns there.

All right, that's good to hear.

And then just thinking about the transactions that were in done in Great Park this quarter, so of the 100, sorry, 1,007 lots, could you break those out for what lots were earmarked for single-family attached and detached?

I think that we can do that, we give you the breakdown but you know, we have products over here that is like a -- we call attached, you know, it's like a combination of the two, so it all depends on where it sits but it's somehow 50-50.

All right, and then I guess kind of in that same train of thought, how are you seeing the builders demand for the single family attached versus detached, obviously we are seeing home prices keep accelerating specifically in California and as well, affordability starting to get stretched and then there is the new news about the mortgage interest deduction, just seeing, if you, you know, looking ahead, if builders stared to maybe demand a bit more or look towards you to deliver a bit more of the attached product to meet that affordability needs, would you be able to pivot and kind of, I guess, adjust the development plan to meet those needs?

Thanks.

The answer is yes. I mean one of the biggest advantage we have in each of our communities is that we have total flexibility in terms of product to adjust in real time to what the market demands are. And if you follow what we have done, the Great Park for instance, is an example from our first neighborhood which was 100% single family detached, and how we progressed, we basically focused on as broad of a price point as possible and to stay within an affordability index as that are accepted.

So you see us actually, today, much more focused on products that meet the price point and therefore, some of it might be attached, as I said, some of it might be you know, detached condominiums and things like that, and so we have a focus on that.

The answer to the question is yes.

All right. Thank you for the time.

Dan Furtado, Philadelphia Financial.

Good afternoon, Emile and Erik, thank you for taking my questions. I just had a real quick one and that would be on the potential for the acquisition and/or development of the conquered property here in the Bay Area.

So I mean, we have said before, we managed that asset for Lenar and in the agreements with the city, there are provisions that allow for that to be transferred to Five Point but there is no agreement yet in place or an option or something like that.

You know, we publicly said it's probably more of a natural type of an asset to fall on the Five Point side of the equation but nothing new to announce somewhat has been set before.

Excellent. Thank you.

Of course.

Ladies and gentlemen, we have no further questions.

I'd like to turn the conference over to Mr. Haddad.

Thank you, Jay, and thanks everyone for joining us. Hopefully, you share our excitement as we move forward and we feel very, very confident that the execution of our strategy is very much on track and hopefully, every quarter, we will be able to share with you stories like we did today to help people realize the value of the Company.

So thank you again and we will talk next quarter.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.